nonprofit accounting methods

Tax990 Tips: How to Change the Accounting Method of Your Organization

An organization has so many moving parts. Sometimes the plan made when the organization was formed such as the accounting method needs to be changed as the organization grows. It is important to follow necessary processes when changing the organization’s originally filed guidelines. 

In this blog post, we’ll be walking you through the process of updating your organization’s accounting method. 

What is an Organization’s Accounting Method?

An accounting method is the process an organization follows to record revenue and expenses, with most organizations using either a cash or accrual method. Here’s a brief overview of each.

Cash Method:
  • Records revenue when cash is received.
  • Records expenses when cash is dispersed.
  • Recognizes revenue instantly upon receipt of cash.
  • Records expenses immediately upon cash disbursement.
Accrual Method:
  • Records revenue when it’s earned.
  • Records expenses when they’re incurred.
  • Revenue is recognized when earned, regardless of cash receipt timing.
  • Expenses are recorded when incurred, irrespective of cash payment timing.

On a 990 series return, you are required to report to the IRS what type of accounting method your organization follows. 

How Does an Organization Change the Accounting Method? 

If your nonprofit organization needs to indicate to the IRS a change in the accounting method, you would need to start by filing Form 3115, the application for change in accounting method. 

Here’s what you need to know:

  • Form 3115 should be filed during the tax year in which the change was initiated.
  • The form must be approved by the IRS before the organization’s 990 series deadline.
  • Form 3115 can be paper-filed to the IRS if necessary.

However, if your organization is under Section 501(c), you are not required to file Form 3115 to change the accounting method. Instead:

  • Contact the IRS to request permission to change the accounting method.
  • Indicate the change on your 990 series return.
  • Failure to reach out to the IRS before making the change on your 990 series return could result in IRS penalties.

Next Steps for Your Organization’s Accounting Process

Once you receive confirmation from the IRS, either by email or phone approval, you can indicate the change on your 990 series return. 

Here’s what you need to remember:

  • Follow the new accounting method reporting when providing information on revenue and expenses on both the 990 series returns and all associated filed schedules.
  • Your organization must adhere to the chosen accounting method for all revenue and expense recognition.
  • Avoid switching reporting based on the organization’s financial status or revenue and expense type.

Consistency in reporting is crucial for compliance and accuracy in financial reporting. Tax990 is here to increase the accuracy and eliminate the stress from your 990 e-filing process! 


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